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Investment Overview for Alcoa (NYSE:AA)

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Below are key drivers of Alcoa's value that present opportunities for upside or downside to the current Trefis price estimate for Alcoa:

Primary Metals Division

Primary Metals Shipments: We expect Primary Metals shipments to decline in 2015 as a result of the curtailment of high-cost smelting capacity by Alcoa in 2014. Shipments will recover only gradually after 2015, due to slowing economic growth in major markets such as China. Shipments are expected to grow at a higher rate towards the end of the forecast period, as demand recovers. However, if economic conditions improve faster than expected, there may be a higher than expected growth in shipments over the forecast period. This scenario represents a 3% upside to our price estimate.

Primary Metals EBITDA Margin: EBITDA margins for the Primary Metals division are expected to rise in 2015 and 2016 as a result of the company's efforts to increase the productivity of its operations. However, if the company is unable to realize these improvements in productivity, the expected margin improvements will not be realized. This scenario represents a 6% downside to our price estimate.

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Alcoa is the leader in the production of aluminum products such as primary aluminum, fabricated aluminum, and alumina. The company is involved in every aspect of the industry including mining, refining, smelting, and recycling.

Aluminum products and alumina represent more than three-fourths of Alcoa’s revenues; accordingly the company is heavily impacted by aluminum prices. The company's non-aluminum products include fasteners for aerospace and industrial customers.

Alcoa operates in more than 30 countries worldwide, in addition to investments in Australia, Brazil, China, Russia, Guinea, and Saudi Arabia.

Bauxite, the primary ore used in aluminum production, along with alumina and power, make up most of the company's operating costs. Other raw materials used include petroleum coke, aluminum fluoride, fuel oil, steam, and coal.

Macroeconomic conditions limit upside to aluminum prices in near term:

Aluminum has diverse applications in industry. Thus the sales of aluminum are largely dependent on global economic growth. China, the world's largest consumer of aluminum, is expected to witness a slowdown in GDP growth to 7.1 in 2015%, from 7.7% in 2013, and 7.3% in 2014. Weakness in Chinese economic growth will result in weakness in demand for aluminum. This would limit the growth in aluminum prices in the near term.

Indonesian export ban to provide support to prices

As per the provisions of a law passed by its Parliament, the Indonesian government halted the exports of bauxite ore from the country in January 2014. The country intends to boost its domestic mineral processing capacity at the cost of exporting unprocessed mineral exports. Bauxite is the key mineral ingredient for the production of alumina. Indonesia accounts for 10-15% of global bauxite supply and about 50% of shipments to China, the world’s largest aluminum producer. China may be forced to import more expensive bauxite in order to meet its requirements, once it runs down its bauxite inventories. More expensive input prices will provide support to the prices of both aluminum and alumina.

Strong growth in aerospace end markets

Alcoa expects strong long-term demand from its aerospace end markets. Current order books for commercial jets represent eight years of production at 2014 delivery rates. The strength in demand is also represented in demand for jet engines with around 23,000 engines on firm order.

Strong growth in automotive end markets

The company expects robust demand from its automobile end markets, particularly in North America. The average fleet age in North America stood at around 11.4 years in 2014, as compared to a historical average of 9.7 years. In addition, there is increasing demand for aluminum components from the automobile industry as manufacturers aim to reduce the weight of their automobiles in order to meet increasingly stringent emissions regulations.

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.

We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

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